Inflation Flashcards
Inflation
The sustained rise in the general level of prices
Purchasing power
When the value of mone fall during a period of inflation (buy less with the same amount of money)
Deflation
Sustained fall in the average price level
Disinflation
Fall in the rate of inflation
Stagflation
A situation with persistent low inflation combined with low economic growth
RPI
Measure of the average price level of goods and services in the UK
CPI
Measure of the average price level of goods and services in the UK without household costs and cousil tax costs
CPIH
CPI including household costs
Calculatin CPI
Base year - index
Monetarist theory
This means people are increasing their spending on good and services at a faster rate than producers can expand the supply of goods and services
(Market prices are forced to rise)
Demand pull
Inflation initiated by an increase in aggregate demand
Aggregate demand
Total demand for final goods and services in an economy at any diven time
Examples of demand pull inflation
Rising consumer spending
Sharp increase in government spending
Booming demand for exports
Cost push inflation
Inflation indtiated by an increase in the costs faced by firms, so they increase prices
Examples of cost push inflation
Wages increasing
Higher profit margins
Rising costs of production
Imported inflation
Changes in the exchange rate will also cause the prices of goods and services to increase or decrease
Costs of inflation on individuals
Reduces purchasing power
People who have fixed will have lower standards of living
It reduces the real income of every person in terms of what their income an buy over time
Costs of inflation on firms
Increases costs of production
Workers demand higher wages
Reduces competitiveness of exports
Costs of inflation government
Unemployment may rise (more benefits + reduces tax revenue)
State pension and benefits rise
Lower economic growth due to less spending
Benefits of low inflation
Stability - firms can predict future prices
Low inflation encourages investment
Workers receive higher/normal wages
Shoe leather costs
When individuals need to get more cash as prises rise
